Stocks fall two percent on weak retail sales

Stocks retreated more than 2 percent on Wednesday and bond prices rose after two reports suggested the economy is not bouncing back as quickly as investors hoped.

The Commerce Department said retail sales unexpectedly fell in April for the second straight month, while RealtyTrac Inc. reported a troubling rise in home foreclosures.

Investors are mindful that the Dow Jones industrial average spiked 31 percent from its early March lows -- the biggest jump in such a short span since the 1930s. After Wednesday's decline the index is still up 26.5 percent from March 9, but investors are now wondering if the market will see a sharper pullback.

Analysts say a drop of 10 percent from the market's recent peak would hardly be surprising, especially since recent economic readings have failed to beat forecasts.

"Overall, it's just a market that's due for a pause, due for a pullback, due for consolidation," said Quincy Krosby, chief investment strategist for The Hartford. "You don't want markets to skyrocket. The higher you go, the deeper you fall."

Few analysts, however, anticipate the stock market to sink lower than it did in March.

"What we've done over the past month-and-a-half is remove this idea of Armageddon," said Charlie Smith, chief investment officer at Fort Pitt Capital.

The decline put the S&P 500, a widely used barometer for mutual funds and professional investors alike, back into the negative column for the year to date. The had S&P edged above that level on May 4.

During the market's two-month advance, investors grew accustomed to data indicating that the economy, while not growing, was at least bottoming out. This week, unexpectedly worse data has thrown a wrench into the works.

On Wednesday, economists predicted April retail sales would be flat, but instead they fell, and March's sales decline was revised to an even larger drop.

Macy's Inc. offered another sign that consumer spending is not on the rebound. The department store operator said its loss in the first-quarter widened from a year ago to $88 million. Macy's fell 83 cents, or 6.7 percent, to $11.52.

Meanwhile, the main driver of the recession -- the collapsing housing market -- has yet to turn around. RealtyTrac data said April's foreclosures were up 32 percent from a year ago, and up slightly from March. It was the second straight month that more than 340,000 U.S. households received a foreclosure filing.

More economic data is on the way this week. Nicholas Colas, chief market strategist at BNY ConvergEx, said Thursday's weekly unemployment claims report is weighing on the market. The release will be the first to fully incorporate plant closings at Chrysler LLC -- making it a "real wild card," he said.

"As a trader," he said, "do you want to build positions ahead of the number?"

Financial stocks once again drove the market. The KBW Bank Index, which tracks 24 of the nation's largest banks, fell 6.5 percent.

Krosby pointed to both stock and bond offerings by banks, which dilute current shareholders, and news that the Obama administration wants a say in executive pay at financial institutions.

Bond prices rose on Wednesday's negative economic news, pushing the yield on the benchmark 10-year Treasury note, a benchmark for key borrowing rates such as home mortgages, down to 3.12 percent from 3.18 percent late Tuesday. The yield on the three-month T-bill slipped to 0.16 percent from 0.17 percent.

About 9 stocks rose for every one that fell on the New York Stock Exchange, where consolidated volume came to 6.7 billion shares, little changed from Tuesday.

The dollar mostly rose against other major currencies, while gold prices also rose.

The biggest gainer in the Dow was General Motors Corp., which dropped to its lowest price since April 1933, and then attracted bargain hunters. GM ended up 6 cents, or 5.2 percent, at $1.21.

CME Group Inc., the parent company of the Chicago Board of Trade and the Chicago Mercantile Exchange, rose $15.62, or 6 percent, to $274.10. A draft letter to Congress said the Treasury Department wants a central electronic-based system to track the buying and selling of over-the-counter derivatives.

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